2023-06-11 23:15:23 ET
Summary
- Centamin reported strong Q1 results with a 13% increase in gold production and margin expansion, tracking well against its FY2023 guidance midpoint of 465,000 ounces.
- The company's strong balance sheet can easily support another year of elevated capex, pre-development study work at Doropo, and exploration spend, allowing for growth without share dilution.
- Given Centamin's solid execution & a path to continued margin expansion with a potential grid connection, higher output, and Doropo, I would view pullbacks below US$1.03 as buying opportunities.
It was a mixed Q1 Earnings Season for the Gold Miners Index ( GDX ), with several producers reporting margin compression on a year-over-year basis, with inflation proven stickier than hoped, especially regarding labor. Fortunately, Centamin ( CELTF ) was one of only a handful of mid-tier producers to report strong results and margin expansion, and the company is tracking well against its FY2023 guidance midpoint of 465,000 ounces. And while we can attribute much of its margin expansion (Q1 2023 vs. Q1 2022) to lapping easy comps in the year-ago period, Centamin continues to pave a path for continued cost improvements at Sukari and potentially on a consolidated basis, if it green-lights its high-margin Doropo Project in Cote d'Ivoire. See our previous coverage on Centamin here. Let's look at the recent results and the forward outlook below:
All figures are in United States Dollars unless otherwise noted.
Q1 Production & Sales
Centamin released its Q1 results earlier this year, reporting quarterly production of ~105,900 ounces of gold, a 13% increase from the year-ago period. The Sukari Mine's significant increase in output was driven by strong mill performance (~3.0 million tonnes processed), and a material increase in contribution from Sukari Underground, with ~236,000 tonnes mined (stope and development ore) at an average grade of 4.02 grams per tonne of gold. The exceptional performance at Sukari Underground was attributed to better productivity with a shift to owner mining which is paying dividends, with a 53% increase in tonnes mined and a 13% increase in grade vs. Q1 2022 levels. Centamin also noted that wet commissioning of the paste fill plant began in Q1, with first paste expected this quarter.
Based on ~105,900 ounces produced in Q1, Centamin is tracking ahead of its guidance midpoint of 465,000 ounces in FY2023, given that output is back-end weighted (45%/55%), with the ~105,900 ounces slightly ahead of the implied ~209,000 production plans in H1-2023 as part of this back-end weighted profile. And with improved open-pit grades expected as the year progresses plus a steady contribution of much higher grade ore from Sukari Underground, 2023 is setting up to be a very solid year for the company. It's also worth noting that while underground mining rates have improved considerably on a year-over-year basis (~950,000 tonne per annum annualized rate) and also sequentially (+ 1% vs. Q4 2022 levels), grades should continue to tick higher, with the higher grade Sukari Underground ore making up a larger proportion of total feed as the company works to increase underground mining rates to 1.5 million tonnes per annum by FY2025.
Given the increased gold production and higher gold price in the period, Centamin's quarterly revenue improved to $205.2 million (+8% year-over-year), with ~107,700 ounces sold at $1,902/oz. Given that capex spend was a little behind schedule in Q1 (and is back-end weighted like production), Centamin managed to report positive free cash flow in the period (~$8.0 million vs. [-] ~$23.0 million in Q1 2022) despite limited helped from the gold price which was more or less flat year-over-year ($1,902/oz vs. $1,883/oz). This helped the company to end the period with one of the stronger balance sheets among its single-asset producer peers, with ~$155 million in cash and bullion, ~$300 million in total liquidity with its undrawn revolving credit facility. Centamin's strong balance sheet will support another year of elevated capex, pre-development study work at Doropo and exploration spend plus what's likely to be a positive construction decision on Doropo in the next 18 months.
Costs & Margins
Moving over to costs and margins, Centamin was one of the few mid-tier producers to report margin expansion in Q1, with all-in sustaining cost [AISC] margins increasing to $554/oz vs. $325/oz in the year-ago period. This was driven by a 13% decline in all-in sustaining costs ($1,348/oz vs. $1,558/oz), related to increased sales volumes which offset the higher input costs from fuel and most consumables. As for cash costs, they also fell 7% year-over-year to $937/oz, a much more respectable figure than the $1,006/oz reported in Q1 2022. And while Q2 all-in sustaining costs are likely to remain above $1,330/oz, which is slightly over the FY2023 guidance midpoint of $1,325/oz, further margin expansion looks likely in Q2 given the benefit of the higher gold price. Plus, on a year-over-year basis, Centamin should see material margin expansion, with AISC margins likely to come in above $600/oz (FY2022: $395/oz) assuming a $1,930/oz average realized gold price.
Looking ahead to FY2024, there's reason to be optimistic about further cost improvements, with what should be slightly higher production as underground mining rates continue to increase and the potential for lower power costs. As noted by Centamin, it continues to look at further expansion to its solar capacity, with a 36 MW solar plant and battery storage system commissioned in 2022. This is displacing a significant amount of fuel (~70,000 liters per day), and a further expansion would help to reduce costs further. However, the bigger opportunity looks to be a grid connection with Centamin making progress on this as well.
As noted in its Q1 Conference Call, grid power could be 50% less expensive at $0.11 per kilowatt hour vs. its diesel genset, meaning that its total power costs could decline by ~30% or better with an up to ~50% decline in power costs on its power generation excluding solar. So, assuming a Q1 2025 grid connection to be conservative, which would coincide with increased underground mining rates if the company can meet its goal of steady state ~1.5 million tonne per annum underground mining rates which will push annual production to ~500,000 ounces, we should see a further improvement in costs, with a path for all-in sustaining costs to decline below $1,200/oz, and over 10% below the estimated FY2025 industry average ($1,340/oz). Let's look at Centamin's valuation below:
Valuation
Based on ~1.16 billion shares outstanding and a share price of US$1.20, Centamin trades at a market cap of $1.39 billion and an enterprise value of $1.24 billion. At first glance, this might seem like a steep valuation given that Centamin is effectively a ~250,000 ounce producer from an attributable standpoint given that the Egyptian Mineral Resources Authority owns 50% of Sukari. That said, Tier-1 scale assets (500,000 ounces) often trade at a premium, and Centamin has multiple irons in the fire, with a Pre-Feasibility study due at Doropo this month, and the company hunting for new satellite opportunities near Sukari in Egypt, with a large prospective land package with three claim blocks (Nugrus, Najd, Um Rus), of which Nugrus is the primary focus given its proximity to the Sukari Plant.
The encouraging news about the Nugrus Block is that the hurdle for adding ounces to a mine plan is quite low, with the company noting that even lower-grade (sub 1.50 gram per tonne material) would suffice given the benefit of sunk costs and the short haul distance to the plant. So, while the goal is obviously to make a large high-grade discovery, a moderate size low to mid-grade discovery on this claim block would still be valuable. This is especially true given that the bulk of material being fed to the Sukari Plant (open-pit material) is at 1.0 grams per tonne and the mill could operate at ~13.0 million tonnes per annum (12.1 million tonnes processed in 2022), suggesting that a satellite discovery could displace some lower grade ore in the mine plan. And the combination of higher underground mining rates and a mid-grade feed source (1.5 - 2.0 grams per tonne of gold) with the mill running at closer to 13.0 million tonnes per annum would certainly provide a nice lift to annual production.
Using what I believe to be a fair value estimate of ~$880 million for Centamin's share of Sukari and a fair value for Doropo of ~$460 million, I see a fair value for Centamin of $1.28 billion at a 1.0x NPV (5%) multiple. This doesn't include any exploration upside at any of its projects (Sukari Regional, Sukari Underground, Doropo) nor does it place any value on its recently acquired ~3,000 square kilometer land package, nor its ABC Project (Cote d'Ivoire). If we add in what I believe to be a reasonable value of $200 million for near-mine/regional exploration upside and add in $155 million in net cash, I see a fair value for Centamin of $1.70 billion [US$1.47]. That said, while this fair value estimate points to a 23% upside from current levels, I am looking for a minimum 30% discount to justify starting new positions in small-cap producers. So, while I see upside in Centamin, I don't see enough margin of safety just yet to justify paying up for the stock.
Summary
Centamin continues to over-deliver on expectations despite a tough transition period following movement in a localized area of waste material that has resulted in an accelerated waste stripping program and an overhaul of the previous mine plan. And while the delivery on cost savings has been impressive to date, we could see further improvements by as early as Q4 2024, with work underway to secure a grid connection that could reduce overall power costs by ~30%. So, with a better H2 on deck, a catalyst-rich year with the Doropo PFS and Nugrus Block drilling plus an updated LOM plan which will include the planned underground expansion and mining of higher grades, there's a lot to like about the Centamin story. Hence, if we were to see a dip below US$1.03 where the stock would offer an adequate margin of safety, I would view this as a buying opportunity.
For further details see:
Centamin: Tracking Well Against FY2023 Guidance